Server Software Drives Microsoft's 4Q Gains

Windows Server, SQL Server, and Exchange revenue grow more than 20%, pulled along by enterprise agreements.

Fueled by its server business, Microsoft on Thursday reported revenue of $8.07 billion in its fourth fiscal quarter, an 11% increase over the same period a year ago. The company's flagship desktop operating systems grew at a more modest 4%. Net income for the quarter was $1.92 billion, up from $1.53 billion in the year-ago quarter.

Revenue from server platforms jumped 17% in the quarter, to $1.93 billion. Windows server operating systems and the SQL Server database led the way, with 24% and 34% gains, respectively. "The big core server products performed quite well," CFO John Connors said. Microsoft cited strong demand for Windows Server 2003, launched in April, as another reason for the double-digit revenue gain.

Microsoft's other products all grew, too. Client operating systems crept up 4%, to $2.53 billion. Desktop applications climbed 8%, to $2.35 billion. Enterprise applications, reflecting the acquisition of Navision, more than doubled to $179 million. Online revenue from MSN grew 25%, to $559 million. Mobile products and games were also up for the quarter.

Victor Raisys, an analyst with SoundView Technology Group, says Microsoft had a good quarter, with revenue coming in above projections and earnings slightly under. The bottom line was affected by a $796 million charge related to the settlement of a lawsuit with AOL Time Warner, which had charged Microsoft with abusing its monopoly power against Netscape, a Web browser that AOL bought in 1999 when Microsoft's Internet Explorer was already becoming the dominant browser.

Raisys, who owns Microsoft stock, says the shift by business customers from standard editions of the company's server products to more-expensive enterprise editions bodes well for continued growth in that part of the business.

Enterprise agreements signed with business customers were "quite good," with sales to government particularly strong, Connors said. Unearned revenue increased $483 million in the quarter, a jump that was larger than expected by Microsoft and was driven by new and renewal license agreements.

For the fiscal year ended June 30, Microsoft reported revenue of $32.19 billion, a 13% increase. Connors said the company saw double-digit growth in each of its businesses for the year.

Microsoft predicted continued growth in its current fiscal year, with projected revenue of between $34.2 billion and $34.9 billion. The company expects its server business to grow 8% to 12% for the year and its business solutions applications business to grow to between $700 million and $750 million. "We're leaving [fiscal] 2003 very well positioned in all parts of our business," Connors said.

As of July 1, the beginning of its fiscal year, Microsoft will start including equity compensation expense in its financial statements, Connors said. That will include revisions to past results to provide accurate comparisons.

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